U.S. Bank National Association v. Goldman Sachs Mortgage Company

Background

U.S. Bank National Association serves as trustee for the GS AMP Trust 2007-HE1, which holds mortgage loans supporting residential mortgage-backed securities. Goldman Sachs Mortgage Company, L.P. was the sponsor that transferred approximately 3,625 mortgage loans to the trust through GS Mortgage Securities Corp., the depositor. The trust issued certificates that were sold to investors.

The parties’ agreements included a Representations and Warranties Agreement requiring Goldman Sachs Mortgage Company to cure or repurchase loans that violated its warranties and materially harmed the value of the loans or the depositor’s interest. The agreement described cure or repurchase as the “sole remedy” for warranty breaches. The Pooling and Servicing Agreement also required the depositor to use reasonable efforts to help the trustee enforce the sponsor’s obligations.

U.S. Bank alleged that Goldman had transferred defective loans despite indications that many loans had not received adequate review. After an investigation, U.S. Bank notified Goldman of alleged breaches involving at least 617 loans. Goldman did not cure or repurchase the loans, and GS Mortgage Securities Corp. did not provide the assistance U.S. Bank requested. U.S. Bank sought specific performance of the repurchase obligation and money damages, as well as punitive damages and attorneys’ fees. It later abandoned its claims that Goldman failed to notify it about defective loans.

Consent to Enforcement

Goldman argued that Section 2.07 of the Pooling and Servicing Agreement gave GS Mortgage Securities Corp. an unrestricted right to refuse consent to any enforcement action by the trustee. The court rejected that interpretation at the motion-to-dismiss stage.

The court concluded that the words “with the Depositor’s consent” did not clearly create a condition requiring the trustee to obtain the depositor’s approval before suing. The agreement transferred the depositor’s rights in the trust property and the Representations and Warranties Agreement to the trustee, assigned the trustee primary enforcement responsibility, and required the depositor to use reasonable efforts to assist enforcement. Reading the consent language as an absolute veto would, in the court’s view, undermine those provisions and the agreement’s stated policy of acquiring only qualifying mortgage loans.

The court therefore denied Goldman’s motion to dismiss U.S. Bank’s breach-of-contract claims.

Exclusive Repurchase Remedy and Money Damages

The court recognized that the agreement plainly described cure or repurchase as the sole remedy for warranty breaches. It nevertheless concluded that U.S. Bank plausibly alleged that money damages could be available.

First, the court held that U.S. Bank plausibly alleged gross negligence. Under New York law, a contractual limitation cannot exculpate a party from damages caused by grossly negligent conduct. The court followed New York intermediate appellate decisions allowing similar claims to proceed in mortgage-securitization cases.

Second, the court explained that money damages may be available when specific performance is impossible. The court had previously held that equity may award damages instead of a requested equitable remedy when specific performance cannot be carried out, such as potentially for foreclosed or liquidated loans. Because the court could not determine at this stage whether specific performance would be possible for every loan, it denied Goldman’s motion to dismiss the money-damages claims.

Punitive Damages

The court also denied dismissal of the punitive-damages claims. U.S. Bank alleged that Goldman deliberately misrepresented the quality of the mortgage loans to induce investors to purchase the securities, that the conduct affected the trust, and that it formed part of a broader pattern causing substantial losses to members of the investing public. Taking those allegations as true, the court found that U.S. Bank plausibly alleged the type of egregious conduct and independent fraud required for punitive damages on a contract claim under New York law.

Attorneys’ Fees

The court denied dismissal of U.S. Bank’s attorneys’ fees claims. The Pooling and Servicing Agreement defined the repurchase price to include expenses arising from the trustee’s enforcement of the sponsor’s repurchase obligations. The court found that this language expressly covered litigation expenses incurred in enforcing the agreement, unlike provisions that merely provide indemnification for third-party claims.

Disposition

Judge Alison J. Nathan held that Goldman’s motion to dismiss was granted in part and denied in part. U.S. Bank’s third and fourth claims, concerning alleged failures to notify it of defective loans, were dismissed with prejudice. The court denied dismissal of the breach-of-contract claims and the claims for money damages, punitive damages, and attorneys’ fees. The court granted the motion for leave to file an amicus brief and denied as moot U.S. Bank’s letter motion for oral argument. The court stated that it would set a status conference by separate order.